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The Big Shale Short: Twitter Traders Make Millions On The Oil Price Crash

If one day Hollywood picks up a movie to make about this year’s decline in the U.S. oil industry, it could call it ‘The Big Shale Short,’ after the 2015 film ‘The Big Short.’

The blockbuster from 2015 tells the true story of a bunch of investors who bet against the U.S. housing market before the subprime mortgage crisis and the market collapse in 2008, making millions of US dollars from their shorts.

‘The Big Shale Short’ may have just found its lead characters. On Twitter.

A bunch of petroleum engineers and traders, banded under the Energy FinTwit (#EFT) hashtag, have expressed for years their bearish views about U.S. shale. They have been shorting U.S. energy stocks for months. And the oil price collapse made them millions.

Not that anyone could have predicted the coronavirus pandemic and the demand collapse that sent WTI Crude prices down to $20 a barrel. That’s why such events are called ‘black swans.’

Yet, the bearish outlier oil analysts who were shorting shale stocks--even when major investment banks were saying the ‘worst in the oil market is over’ or ‘the shale growth decline in 2020 is inevitable but is ultimately good for prices and stocks’--were vindicated by the collapsing oil prices.

The Million-Dollar Payoffs

Some of those traders made millions off the price crash in early March.

BRV @WillRayValentin, for example, told Reuters he made US$4 million in the week March 9-16, when oil prices collapsed in the wake of the OPEC+ break-up and the start of Saudi Arabia’s price war for market share.

“It was like picking money up off the street,” BRV told Reuters on the phone.

The ‘big shale short’ Energy Fintwit group has gained popularity in recent months, and its most prominent members have thousands of followers each—more than the followers of some energy analysts at investment banks.

This goes to show that ‘outlier’ analysts could be as right about the market as all the other investment banks combined.

Some of the clients of banks such as UBS and investment groups such as Pickering Energy Partners follow the #EFT group and want to know more about its members, so the ‘mainstream’ analysts follow on Twitter the Energy FinTwit bunch and even take into consideration some #EFT posts in their analyses.

“The Whiting is on the wall”

The EFT group made one very prescient call about a U.S. shale company.

At the end of October, @WillRayValentin, @energycredit1, and @Oil_Gonif published their research on Whiting Petroleum Corporation, once one of the top producers in the Bakken.

Whiting Petroleum’s stock is “worth $0 at current strip pricing excluding option value,” they said, noting that the company had debt maturities in March 2020 and April 2021 and was likely overstating its reserves, based on the EFT people’s analysis of more than 2,000 individual wells.

“The Whiting is on the wall,” they said, adding that “Oil is the only material driver of WLL stock price currently.” This was on October 31, 2019.

On April 1, 2020, Whiting Petroleum Corporation said it had filed for bankruptcy protection, becoming the first major victim of the oil price war and the coronavirus pandemic that sent oil prices to $20.

“Given the severe downturn in oil and gas prices driven by uncertainty around the duration of the Saudi / Russia oil price war and the COVID-19 pandemic, the Company’s Board of Directors came to the conclusion that the principal terms of the financial restructuring negotiated with our creditors provides the best path forward for the Company,” said Bradley J. Holly, the company’s chairman, president and CEO.

At the time when the EFT group said Whiting Petroleum was worth nothing, Goldman Sachs was saying go long on fracking, with the assumption that the decline in U.S. shale growth is just a temporary blip, and it could take a year or two before the stalled growth brings the market back into balance for prices to rise.

The Black Swan

As it turned out, no one – Goldman Sachs or anyone – could have predicted the fact that not only will the U.S. shale growth flatten but that producers will be fighting for survival this year, rushing to idle rigs, cut capex, lay off staff, and find storage for their unwanted barrels while the U.S. benchmark oil trades at $20 and regional grades are in the teens and single-digits.

Five months ago, no one could have predicted the current 30 million bpd demand collapse in April as the COVID-19 pandemic wipes out a decade of oil demand growth.

The EFT group on Twitter couldn’t have predicted these events, either. But they are having a field day these days—proving that in the oil market even the outlier projections could become mainstream.

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